What should I do with my savings if I have maxed my RRSP and TFSA?

Congrats on your financial success, this is a great problem to have and our Financial Planner & Cashflow Specialist, Lisa Elle shares her thoughts:

First of all, congratulations on maxing out your TFSA and RRSPs! Did you know that only 5-6% of Canadians have their RRSPs maxed out and 7-8% maxed out their TFSAs? So pat yourself on the back for a job well done in savings and investing and paying yourself first!

So where do you put your money once you have maxed out your registered accounts?

You can put your money into the same investments that you put your TFSA or RRSPs into, such as GICs, Mutual Funds, Stocks, Bonds, Real Estate Investment Trusts, Precious Metals (such as Gold or Silver) and the list can go on.

If you are saving for something specific (like a car, trip, new home down payment) make sure that your investment risk level and strategy matches the time horizon. If your time horizon is less than 2 years, I would recommend a high interest savings account. There are some great banks that offer up to 2% interest for these accounts. This way you have easy access to your money at a better rate than the big banks!

These accounts that you set up are called “Non-Registered Accounts” or we can also call them OPEN money, meaning there is no restriction on how the money can be moved around and no need for reporting, like the reporting that needs to happen with CRA for RRSPs and TFSAs.

Also, this money is put into these accounts with after-tax dollars, that means that you will have to keep track of the amount invested and the growth (capital gain) or loss (capital loss) that is connected with these investments. This is sometimes given to you on organized statements from your bank or investment firm, however more than not, you have to keep track of how much you bought and sold for. This reporting is not done for you and is based on the honour system for the most part. Although with technology, this could change.

Plus, once more room is created in your RRSP or TFSA account in a new calendar year, then it’s easy to keep those accounts maxed out by transferring your non-registered assets into these accounts, if this is tax beneficial to you. Again, on that note, to see if it is of tax benefit to you

I’m trying to raise my credit score, is getting a loan for an RRSP (retirement contribution) a good idea?

“I’m trying to raise my credit score, is getting a loan for an RRSP (retirement contribution) a good idea?”

This is a loaded question.

You see your credit score is calculated using 5 major criteria balanced against each other.

1. You payment history. This is inclusive of: Bankruptcies, late payments, past due accounts and wage attachments, collections and judgements. Basically… what payment patterns have you demonstrated in the last 2-7 years?

2. Amounts Owed. Note this means the amount you owe or use vs the amount available to you. Are you showing restraint? You show restrain by keeping your balance below 75%, paying on time and making more than the minimum payment.

3. Length of credit history: The amount of time you have had your credit products. The key word here is history. This is a great way for lenders to have an indication of your character as a borrower. The best indicator of future behaviour… is past behaviour.

4. New Credit: The number of credit inquiries you have had within the last year. Are you desperately looking for new credit or are you keeping inquires below 6 per year?

5. Types of credit accounts (Credit Cards, Retail Cards, mortgage lines of credit, Loans and etc.) Technically speaking… and to make things confusing, there are 2 types of credit accounts: Fixed and revolving.

A fixed account would be a loan with a fixed payment schedule. This is like a car loan. It has a fixed payment set by the bank that you pay over time. Also you don’t gain to access to credit as you make your payments.

Revolving accounts are like credit cards. These accounts have a standing limit that becomes available to you to use again, as the payments are made.

Revolving accounts can have a faster positive effect on your credit. They give you the chance to show “fiduciary responsibility”. This means you show restraint, by not using all the credit available to you. You also build character by making sure your payments are made on time. It’s also good to exceeding the minimum balance owed as a demonstration of good character.

You are caring for your credit and repayment, instead of following a payment plan.

The five elements above are used in a equation that calculates your FICO score. This is also known as your Credit score.

So in answer to your question: “…is getting a loan for an RRSP (retirement contribution) a good idea?…” the long and the short is… it depends. It depends on the current state of all of the outlying elements on your personal credit report.

Unfortunately savings and contributions to your savings accounts don’t have any effect on your credit score. And while it is advisable to contribute to your RRSP for the financial security of your future, the act alone will not affect your credit today.

However, taking out a loan may have a positive effect on your credit depending on the existing state of your report.

I would suggest that you have a credit specialist look over your existing credit report. They can highlight any problems you need to address. They can also let you know if taking out the RRSP loan is likely to help you improve your credit.

Finally, it is important to remember that a credit score is like a bolder on a hill… it’s not a problem if it’s at the top as it’s easy to keep it there…

But, if it starts to fall it can gain momentum and it takes a lot to stop it and more to push it back up.

That said credit care is an important practice. So take an active interest in your financial education and keep a watchful eye on your score.

I have over $50,000 in credit card debt, no assets and am considering filing for bankruptcy, what should I take into consideration when making this decision?

First of all, you should do all you can to avoid declaring bankruptcy. The reasons – future job prospects, home ownership, a destroyed credit record for several years, and honestly, just the process is one that feels like a financial scourge. There are many alternatives that should be explored before deciding this ‘last option’ is your only option.

Why are you in this position? Is it job loss? Illness? School debt? A trip, car or renovation? A combination?

The answer to this one is important. Living below your means is easier said than done, but debt (for whatever reason) as a 14-year old reminded me the other day, is a result of ‘spending more than you make’ and doesn’t make any sense.

If debt is coming from this simple truth, then declaring bankruptcy won’t solve anything. In fact, it is shocking how many people line up for a second bankruptcy. It’s generally because they didn’t reflect on the root cause of the debt or they didn’t put in place the actions required to avoid the disaster a second time.

Budgeting is a skill

It’s easy to say ‘Spend less than you make’ – but more difficult to do. Understanding how to live below your means, month after month, is a skill. And those that master it save cash for things, avoid debt and enjoy a level of financial peace throughout their life.

If current debt is $50,000, current minimum dues are probably between $500 – $1,500 (depending on the mix of credit cards/lines of credit, interest rates and the financial institutions). While this might seem onerous, every effort should be made to find these dollars by simply spending less.

Millions of Canadians have been able to avoid consumer proposals and bankruptcies by taking control of their discretionary expenses and paying down debt over time. This should always be the preferred choice.

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How can I budget and save without a secure income?

Budgeting without a secure income is the expertise of Lisa Elle who is both a Financial Planner & Cashflow Specialist. Here’s her answer:

Budgeting and saving is sometimes challenging for most of us. Not to mention if you do not have secure or consistent income. So how do you budget and save without a secure income? What if you are on commission or unsure of the exact amount you will earn each month?

I recommend before you take a commission based job without a secure income or base salary to have at least 1-2 months income in the bank as your safety net. If you are already working a commission job, this may be tricky, but best to have that buffer available to you. This may require some financial sacrifice for a few months. You may have to cut back on lattes and dining out for a little while until you have established enough savings that you feel comfortable with. I do think it is important to get a few months ahead, meaning don’t spend what you earned this month, but spend what you had earned a few months ago.

Once you have your “buffer” savings set up, I would then recommend starting an emergency savings account in separate account. It’s okay if you have to build up your emergency savings fund slowly.

It is best to set an amount you feel comfortable with and every month have that amount transferred automatically to your emergency fund.

Without a secure income it can be frustrating to juggle your finances. Creating a safety net account and emergency fund will give you a sense of confidence and security.

Most importantly, do not be too hard on yourself if you have a bad month. I have worked commission jobs many times. You have to take the good months with the bad months. It’s usually the good months that get us into trouble and give us a false sense of security. When money is flowing, that is when we need to be setting some aside for the bad times.

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If I get a significant financial gift from a family member, do I have to pay income tax on it?

Receiving a financial gift and it’s tax implication is a question for our accountant, Cara Orzech:

Who doesn’t like to receive a financial gift? Whether it’s a birthday, graduation or wedding, $10 or $10,0000, while the benefactor (the person giving the gift) is alive or as a result of their death, it is common to provide financial gifts to loved ones. But what are the tax implications of a financial gift?

A gift, as defined by the Merriam-Webster dictionary, is something voluntarily transferred by one person to another without compensation. For tax purposes, a gift is a transfer of property where less than full value (or less than fair market value) consideration is received in exchange. Unlike the U.S., Canada does not have a gift tax. This means that there is no limit to the amount that can be gifted to a family member, and no taxes are payable by the recipient at the time of receipt of the gift.

However, there are other tax and legal implications to consider before making financial gifts to loved ones.

When making a gift, the benefactor is deemed to dispose of the gifted property for notional proceeds equal to either the original cost of the property (for gifts to a spouse), or the fair market value of the property (for gifts to anyone other than a spouse). Gifts of property other than cash, that are subject to a deemed disposition at fair market value, can attract tax where the property has increased in value since the time of original purchase. However, where the financial gift is cash, the deemed disposition would not attract tax to the benefactor.

If the recipient of the gift is a minor (<18 years of age), or a spouse, there may be further tax implications to the benefactor after the time that the gift is made. In these instances any future income generated from the investment of the gifted property (cash or otherwise), will be taxable to the original benefactor. This concept, known as attribution, ensures that financial gifts are not made to spouses or minor children for the purpose of shifting income to another taxpayer. The attribution rules may also apply if a financial gift is made to a person (other than a spouse or minor) for the purpose of avoiding tax.

If a significant financial gift is made to a family member during the benefactor’s lifetime, it may be prudent to prepare a deed of gift, or to document the benefactor’s intent. Post-mortem legal disputes can arise where a financial gift is made during the benefactor’s lifetime, but family members disagree as to the benefactor’s intent at the time of the transfer. Preparing supporting legal documentation can help to avoid future family disputes.

How do I start to talk about finances with the new partner I’m dating?

Cupid has been working his magic and you finally have this great guy in hand. Things are heating up with your partner and your relationship is progressing nicely. You are wanting to take it to the next level.

Naturally, the subject comes up about moving in together, joining forces financially, or getting married. However, the awkward subject of money has not come up yet. Deep down you know you have to have this conversation at some point but you are procrastinating big time (worse than the laundry you’ve been meaning to do).

So how do you bring up the conversation in an easy way? Simple. Start slowly. It is not wise to have your financial conversations all in one sitting.

Bring up easy and fun money questions with your partner by slipping them into dinner conversation, for example. Start by talking about stories from your past. Talk about how you and your partner were raised and the beliefs you hold around money. This keeps it light and fun before you start getting into the harder issues.

It doesn’t take long to figure out if you are both on the same page financially. (By the way, if you aren’t on the same page, this could be a big red flag and may signal that this relationship is not for you. Trust your intuition here!)

Here are some questions to get the conversation started:
What is your earliest memory around money?
What did your parents teach you about money?
Did your parents make you save money as a child?

What did money feel like to you growing up?

Did your parents help you pay for college/university?

What do you think is the purpose of money?

When you start easing into the conversation, it naturally leads to discuss more complicated financial matters and there is another bonus, you get to know your partner better.

How do I choose a financial planner who is reputable and has my best interests at heart? Fee based or commission?

The first thing you should be aware of is that there are tens of billions of dollars in profit made in financial services in Canada. Not only is it profitable from a corporate standpoint, but those attached to it – bankers, advisors, agents, counsellors and professionals of all kinds – are also able to earn significant earnings from the industry.

I mention this because where there is profit, there is bias. There may be aggressive sales people. There may be win-lose conversations happening. Knowing how someone is paid can either remove this bias or at least keep you fully aware of when your best interests may not be aligned with the interests of the professional you are working with.

Now, think about what your needs are. Are you struggling with debt and would benefit from a cash flow expert? Are you looking to invest and in need of investing advice? Are you unsure what to do with an inheritance? Do you know what you want to do, but are just unsure how to execute the financial plan?

Once your needs are determined, the goal should be to seek an experience and qualified professional who can assist you. While I have my own opinion on this, if you want to ensure that your advisor’s interests are aligned with yours, make sure that they are a flat-fee (or fee-only) planner. And the Certified Financial Planner® designation – the gold standard in the industry – will bring additional confidence to your process.

In my experience, process is far more important than product. There are thousands of ‘financial products’ and while implementation is an important part of a comprehensive financial plan, I believe that the education process is critical to helping a client achieve their financial goals. Being aware of the principles that will lead to an empowered financial life is far more important than the blind purchase of a mutual fund.

Feedback from my clients these past 6 years as a full-time Money Coach has confirmed my belief that the best way for someone to improve their financial position (regardless of the tax bracket they might be in, or the challenges they may face) is to improve their own financial literacy. Trusting someone else with your financial future – who might profit from the decisions made – is dangerous. Remember, what is better for the seller is often worse for the buyer. And vice versa.

So to summarize: consider what your needs are, what experience, expertise and qualifications you are looking for in a professional, interview a few different professionals to determine fit and comfort, know how someone is paid and do your best to minimize bias in the process, and consider the benefits of a fee-only financial planner.

What is the difference between disability insurance and critical illness insurance? Which one is right for me?

In my time as a Living Benefits Specialist and Business Coach, I have found the discussions and resulting confusion around disability and critical illness insurance to be tremendous. We can solve much of the confusion by first understanding what the two products are and then understanding how they can potentially fit within your financial plan.

Let’s start with a better overview of the products:

Disability Insurance: Disability insurance is a product that is meant to replace your income if you are unable to do the regular duties of your job, due to an illness or injury. Most of the products in the market give disabled clients the ability to receive an income until they are 65 years old, often on a tax-free basis.

There are many unique options that disability carriers offer (i.e. inflation protection), especially for those who purchase the product outside of an employer sponsored plan. Disability insurance usually provides about 2/3 of your income, however this is a general rule and you should always have a qualified advisor review your policy in order to properly guide you in this area.

Critical Illness Insurance: Critical illness insurance is a product that has been in Canada for around 20 years. It was created by a Doctor in South Africa in conjunction with the insurance companies, to help clients financially recover from a critical condition, such as Cancer, Heart Attack or Stroke.

Critical illness insurance provides a lump sum of money (usually tax-free) to a client if they are diagnosed with one of 25 or so conditions. The money can help with costs associated with hospital visits; drugs not covered by the province or your health plan, home care and even allow a spouse or family member to have the financial ability to take time off work to help support their sick loved one. Also, many policies in Canada have options that allow you to receive 100% of your money back if you do not claim within a certain time period.

Which one is right for me? This is a frequent question I get. Most people tend to be scared of a critical illness because of how it has impacted them personally. Also, the fact that you get your money back if you never get sick has great appeal. However, the products are meant to complement and not replace one another.

The best way to think about them is to use your car as an example. Disability Insurance is like you seat-belt. It is a must-have given that it protects your most valuable asset…your ability to earn an income. A $3k/month benefit may not sound like much, but amounts to $36k per year. If you are 25 and permanently disabled, you could be looking at a payout in excess of $1.4 million dollars.

Critical Illness insurance is like the air bag in your car. You would never buy a car without one, but would never choose it over your seatbelt. It allows you to deal with a pay-cut when you are receiving disability income, while protecting your assets and giving you choice at a time you need it most. The reality is that most policies in Canada have a face amount of around $100k…enough money to make a difference during a health crisis, but not enough to replace the income you stand to earn in your career.

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What are the benefits of a contract position vs. being a full time employee?

To help understand the difference between a contract position, and a full time employee, let’s get the expertise of our recruiter, Lauren Markman Ritchie:

There’s a big divide in the world of employment. On the one side, there are people who would only consider full-time positions and believe that a contract position is highly undesirable. On the other side, there are people who love the benefits of a contract position and will only seek such roles.

So which side are you on?

More and more jobs in Canada are being offered on a contract basis. Generally, a contract position is set for a fixed period of time, say 3, 6 or 12 months and sometimes even longer.

There are many benefits to taking on contract positions. It allows you to switch jobs more often and gain exposure to a variety of industries, companies, cultures and roles. You can keep your skill set sharp and still learn new ones. Contractors also tend to make more money than salaried employees. This is due to the extra costs incurred by employers such as payroll taxes and benefits.

There’s also the financial benefit of deducting work-related expenses for tax purposes.

So what are the downsides? Why do some only focus on full-time positions?

Many people don’t like the idea of having to search for a new role each time their contract position ends. This process can take time and may leave you out of work for longer than expected. Also, contractors do not usually receive company benefits such as company share plan, pension, medical and dental coverage, etc. There is also the added task of filing and remitting your own taxes to the government.

There are strong arguments in favour of both sides and there’s no ‘one size fits all’ approach. What’s important is that you find work that is challenging, meets your financial requirements and advances your career. In the end, it is about what works for YOU!

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